Unit sales give Kroger a boost, not higher prices

12/2/2010

Kroger Co., the largest grocery chain in the U.S., saw its sales and profits rise in the third quarter, even as company executives warned of food deflation and that consumer spending is still in recession mode.

The Cincinnati-based grocer saw its sales, including fuel, rise 5.9% to US$18.7 billion. Stripping out fuel, sales rose 3.1% in the third quarter that ended Nov. 6. Same-store supermarket sales rose 2.4%, excluding fuel.

Kroger said unit sales, which rose in the "low single digits" in the quarter versus last year, were responsible for the hike, rather than higher prices.

Dave Dillon, Kroger’s CEO, described the current grocery environment as “challenging for Kroger” and that customers continue to spend with caution. “The Great Recession may be over but it’s not over until our customers say it is,” Dillon said in a conference call with analysts Dec 2.

Dillon said Kroger’s strongest departments have been nutrition, produce and deli/bakery.

He added that supermarkets are experiencing a mix of inflation and deflation in prices. In the third quarter, prices rose for meat, produce and dairy. However, in core grocery categories, prices fell.

Kroger’s president, Rodney McMullen, said promotional spending by national brand manufacturers is partly to blame for deflation in grocery categories. Prices are down 50 basis points, excluding milk.

Lower pricing had an impact on supermarket gross margins, which were down 13 basis points excluding fuel in the quarter. "Inflation in grocery has been slow to develop, but we still believe it is coming," McMullen added.

Kroger’s officials also noted that national brand manufacturers have become more competitive on their pricing. A year or so ago, national brands hadn’t reduced their prices and, as a result, consumers were switching to cheaper private label products. But manufacturers have since offered more promotions in order to attract customers. Still, McMullen noted that promotions have "masked" price increases national brands have passed to retailers.

Kroger has invested heavily in its private label program of late, with new product launches and packaging designs. The company recently said that it has launched over 600 new private-label products in the past year, incuding its Wholesome@Home meals line aimed at time-starved families. More recently it created unique new ice cream flavours for the holidays, such as New York-Style Pumpkin Cheesecake and Strawberry Peppercorn.

Net earnings for the third quarter at Kroger totaled $202.2 million, or $0.32 per diluted share. In the third quarter of fiscal 2009, Kroger reported a net loss of $874.9 million, or $1.35 per diluted share. The fiscal 2009 results included non-cash asset impairment charges of $1.05 billion, after tax, that primarily resulted from a goodwill write-down.

Kroger operates 2,461 supermarkets in the U.S., under banners such as Kroger, City Market, Dillons, Food 4 Less and Fred Meyer.

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